You are 30 and want to retire at 45? Why not? That’s what a lot of people at the first leg of their careers think. Retiring early is in today.
Many people say that they want to do their own thing after retirement. It’s not that they may not be earning… but the earnings after their early retirement is incidental. To put it in another way, they want to attain financial self-sufficiency by the time they retire.
Is retiring early feasible?
This is a very broad question. It’s going to be feasible in some cases and is going to pose lots of challenges in others. Infact, we will have problems in a whole lot of cases.
The first reason is that most goals are completed by the time one retires by age 60. But, if one is retiring at say 45, most of the goals will be met from the corpus one has accumulated, putting enormous pressure on one’s finances.
The second reason is that there is more time for which one needs to plan and less time to accumulate the higher corpus needed. It’s a double whammy.
Let’s understand this in a bit more of detail.
A much bigger corpus, needed much earlier
Today, people live for very long in retirement. It could well be three decades in retirement. That’s a pretty long time. The unintended effect of retiring early is that the retirement period can now be 45-50 years. While retiring early, one now needs to have a much bigger corpus as it needs to last for much longer. But, this much bigger corpus has to be built in a shorter timeframe, which is the huge challenge.
Let’s take an example to understand this. Mangesh is 30 and wants to retire by 45. His expenses as on date are Rs 40,000/-pm. Let’s assume that expenses come down by 25% in today’s money, at the time of retirement. That means an expense of Rs 30,000/- pm. Here we are not even considering the other goals. Assuming that inflation is 7%, the expenses in the first month of retirement at 45 would be Rs 83,000/-pm approximately. Assuming an investment return of 8% throughout the retirement period, the corpus required to take care of just the expenses (inflation adjusted) for the next 45 years would be Rs 3.6 crore!
Now let’s assume everything remains the same in the above example, but the person retires at 60. The period to provide for would be 30 years. The monthly expense in the first year of retirement is Rs 2.28 lakh. The corpus required then would be Rs 7.08 crore. But for like to like comparison, if we reduce it (by a 8% factor) to what it will be at age 45 of the person, it would be only be Rs 2.23 crore. Looking at it differently, an amount of Rs 1.37 crore difference is the amount that will be extra as the expenses would have been taken care of, as the person was working between 45 & 60.
Impact on various goals
A goal like retiring early can impact other important goals like child’s education, buying a home, travel, buying vehicles etc. as the money required for just the retirement goal would be huge.
Early retirement would hence be feasible, in most cases, only if one scales down/compromises on goals. The only situation where early retirement would be feasible would be a high income earner, who is at the same time a very low spender & has few high value goals. In such cases, the corpus can be accumulated fast and early retirement would be feasible. But such people are rare indeed.
So, in normal cases retiring really early will be a huge problem. We have seen that retiring a few years earlier is a workable alternative.
What one will be forgoing by retiring early
One of the negatives of retiring early is forgoing the high income in the last few years of one’s earning years. It is seen that the savings potential in the last ten years is equal to the saving potential in the entire working life, till then!
There are reasons for that - in the last few years, income would be at it’s peak, all the typical goals would already have been met or provided for, loans may not be present or loan EMI would be a small portion of overall expenses and lifestyle requirements would have moderated. Also, some expenses could have ended – like education/ classes etc. & college expenses have already been provided for. In case where the children have left home to study or to work, the actual living expenses itself would come down.
Another big advantage that, people who retire at the normal superannuation age, is the much longer time available for their investments to compound. This looks like a small advantage, but can be massive if one were to calculate the corpus size after those years.
Yet another advantage of people working longer is that their expenses are taken care of till their retirement. They need to provide for only after that. In contrast, for people retiring early, not only do they have to dip into their corpus for expenses earlier, they will also have to provide for a longer tenure.
Clarify - What do you really want to do?
This is a very important question which people have not answered.
People give vague answers like they want to get away from the rat race, they are fed up of office politics etc. & some say that they want to pursue their interests.
The former sounds like escapism. As far as pursuing one’s interests, it can well be done here and now. One can always create the space for it. We cannot lead meaningless lives till a point and then take a U-turn at one point & lead lives with meaning.
Life is always green on the other side. The man in the plane looks out and sees a man lying on the meadow & thinks how fortunate he is. Man below looks up wistfully & wishes he were in that plane! Such is life.
We keep running after what we cannot get & when we get it, we want something else. Just like
Joker in The Dark Knight, who said – I am a dog chasing cars. I wouldn’t know what to do with one, if I caught it! Aren’t we a bit like that?
Suresh Sadagopan is the Founder of www.ladder7.co.in, a fee-only financial advisory firm and can be reached at firstname.lastname@example.org
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Updated Date: Jul 29, 2015 15:07:11 IST